A bipartisan group of senators took a stand against the existing government-sponsored enterprises this week.
Their strategy—drafting a bill to replace Fannie Mae and Freddie Mac with a single government guarantor, known as the Federal Mortgage Insurance Corp.
Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., are spearheading the bill designed to complete this task. The draft legislation is known as the Housing Finance Reform and Taxpayer Protection Act of 2013.
The legislation is aimed at providing liquidity and mortgage credit in the secondary mortgage market while protecting taxpayers from a potential government bailout.
The Federal Mortgage Insurance Corp. would continue existing efforts to build a single-securitization platform to assist small lenders in issuing securities and continue both enterprises’ existing multifamily guarantees.
The bill is set up to develop risk-sharing mechanisms that require private investors in securities insured by the corporation to assume first-loss positions.
Additionally, the bill would require private investors to take a loss of 10% of the principal underlying securities.
"ASF is strongly supportive of the bipartisan introduction of this legislation, and welcomes the tangible, constructive dialogue concerning the future of housing finance reform in the U.S.," said Tom Deutsch, executive director of the American Securitization Forum.
He added, "For the five years since the onset of the GSEs’ conservatorship, the mortgage reform dialogue has been far too theoretical. While ASF and others all along the political spectrum will likely offer amendments to this or any other GSE reform proposal, this bill represents a strong, concrete first step towards comprehensively restructuring the currently misguided U.S. housing finance system that relies on the U.S. government to backstop over 90% of mortgages made in this country. No other country in the world, small or large, has ever put their taxpayers in such an extreme position."
The legislation would wind down the government-sponsored enterprises over a five-year period.
The new corporation would cover a greater share of losses that threaten credit availability as well as the mortgage finance system. This type of assistance would be limited to six months once every three years, the bill noted.
The legislation would also exempt the securities being covered by the Federal Insurance Corp. from the qualified residential mortgage standard, which is expected to be completed this year.
Meanwhile, the proposal would require banks to hold a portion of mortgage-backed securities that are currently being sold to investors.
The common concern is whether Congress will take the proposed bill into consideration quickly, considering members are not in session and Capitol Hill is dealing with sequestration.
Thus, ASF proposed that Congress and regulators continue to move forward with other incremental steps such as increasing GSE guarantee fees, reducing conforming loan limits and establishing a covered bond market.
"Finding permanent comprehensive solutions may take years for Congress to legislate, so we continue to strongly encourage U.S. policymakers to move forward immediately with additional steps that would incrementally reduce government involvement in the housing finance system and expedite the process of bringing private capital back to the mortgage finance market," Deutsch concluded.